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Marc Faber: Relax, This Will Hurt A Lot

Marc Faber closed out this week’s Agora Financial Symposium with a speech that pretty much recapitulated the view that the end of the world is if not nigh, then surely tremendous dislocations to the existing socio-political and economic landscape are about to take place (with some very dire consequences for the US). His conclusive remarks pretty much summarize his sentiment best: “We’ve had a trend for most of the past 200 years: GDP of countries like China and India went down while the West surged. That’s now changed. Emerging economies will go up, and your children in the West will have a lower standard of living than you did. Absolutely. We won’t sink to the bottom of the sea. But other countries will grow much faster than us. The world is very competitive, and the odds are stacked against us. Americans, with their inborn arrogance, will not let it go that easily, so there will be lots of tension going forward.” While long-time fans of Faber will not be surprised by the gloom and doom (not much boom) here, anyone else who still holds a glimmer of hope that at the end of the day the CNBC spin may be right, is advised to steer clear of Faber’s most recent thoughts.

And while we do not have the full presentation yet, the salient points have been recreated below courtesy of the Motley Fool. For those who desire a far more in depth presentation from the inimitable Mr. Faber, we direct you to his June 2008 capstone presentation: “Where is the boom, and the doom” – link here.

On reality: My views are not all that negative. I think they’re just realistic. I want to face reality. You have people like Paul Krugman who thinks we should have another bubble to pull us out of this. He actually said that. But he said the same thing in 2001. And you know how that turned out.

On unintended consequences: The Fed doesn’t seem to have learned anything at all from its mistakes. Their current policy of cutting rates to zero is designed to create sustainable growth, but they’ve created larger and larger volatility in markets. There are many unintended consequences of their actions.

The oil bubble of 2008 is a good example. In 2008, the price of oil went ballistic, but the U.S. was already in a recession [it began in Dec. 2007]. There was no rational reason oil should have gone ballistic. The Fed’s easy money just fueled a bubble. It was like a $500 billion tax on consumers courtesy of the Fed. That’s the added amount that it cost you, and it helped push consumers over a cliff in late 2008.

On the Fed: The Fed doesn’t pay any attention to asset bubbles when they grow. That’s their official policy. But they flood the system with cash when bubbles burst. They only care about bubbles when they crash. It’s a very asymmetric response and it has many unintended consequences.

Letting bubbles inflate and then fighting them when they burst actually worked for a while. That’s what makes it dangerous. It worked in the ’90s. But you shouldn’t read too much into this: This period was assisted by unusually favorable conditions. From 1981 until early last decade, commodities were in a bear market after a bubble in the ’70s and early ’80s. And interest rates were falling throughout the ’80s and ’90s, too. They almost never stopped falling. That made Fed policy look like it was working.

Bubbles can still happen without expansionary monetary policy. In the 19th century, you had bubbles in railroads, for example. But today, the Fed has created a bubble in everything — in every single asset class. This is an achievement even for a central bank. Stocks. Commodities. Bonds. Real estate. Gold. Everything goes up when the Fed prints. The only asset that goes down is the U.S. dollar.

On deflation: I’m a believer that the stock market lows of March 2009 will not be revisited. You have people like Robert Prechter who think the Dow will collapse to 700 because of debt deleveraging. Debt deleveraging could happen, but the Dow will not fall because of monetary policy. The Fed will keep everything inflated in nominal terms. And if the Dow does go to 700, you’ll have more to worry about than your investments. All the banks will be bust. The government will be bust. You don’t want cash if massive deflation happens. On the contrary: It will be worthless. You have to think very carefully about hardcore deflation. (more…)

Marc Faber's Must Watch 2010 Presentation

As someone once said, the only man who can tell a room full of people they are doomed and get a standing ovation, Marc Faber, gives a terrific hour long presentation to the Mises Circle in Manhattan on May 22, discussing the economy, interest rates, markets, why having massive output gaps (see previous post for Bernanke’s most recent dose of lunacy on the matter) and hyperinflation can easily coexist, why the Fed will never again implement tight monetary policy, why Greenspan is a senile self-contradictor, why Paul Krugman is a broken and scratched record, and the fact that pretty much nothing matters and we are all going to hell. Little new here for long-term economic skeptics, but a must watch for all neophytes who are still grasping with some of the more confounding concepts of our dead-end Keynesian catastrophe and not only why the world can not get out of the current calamity absent a global debt repudiation, but why gold is the asset to own, even though one must not be dogmatic and shift from asset class to asset class in times of tremendous currency devaluation (i.e., such as right now). 2010’s must watch Marc Faber presentation.

One thing we disagree with Mr. Faber on, is that Asian banks did not buy CDOs during the housing bubble – this is patently wrong. As a detailed perusal through the Goldman discovery will confirm, Goldman looked increasingly eastward, first to Europe, and then to Korea, Japan and Taiwan, when finding the dumbest money around to invest in monstrosities such as Timberwolf, Abacus and others. If Mr. Faber is investing based on the assumption that Asian banks are free of this relic of the credit boom, we urge him to promptly reevaluate his investment thesis as he will certainly lose money here.

China on ‘Treadmill to Hell’ Amid Bubble, Chanos Says

April 8 (Bloomberg) — China’s property market is a bubble that may burst by as early as this year, according to hedge fund manager James Chanos.

The world’s third-biggest economy may need to keep up the pace of property investment because up to 60 percent of its gross domestic product relies on construction, said Chanos. The bubble may begin to “run its course” in late-2010 or 2011, he said in an interview on “The Charlie Rose Show” that will air on PBS and Bloomberg TV.

China is “on a treadmill to hell,” said Chanos, who said in January the nation is Dubai times a thousand. “They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.”

Property prices in China rose at the fastest pace in almost two years in February even after officials this year re-imposed a tax on homes sold within five years of their purchase to curb speculation and ordered banks to set aside more funds as reserves to cool lending. The boom in China’s real estate has fueled concern that China may face a collapse seen in Dubai that has hurt the ability of some of its companies to repay debt.

Since his January prediction, Chanos, the founder of Kynikos Associates Ltd, has been joined by Gloom, Doom & Boom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s property market. (more…)

Marc Faber's 2010 Investment Outlook: Bullish Sentiment Too High For His Liking

Always the contrarian, Marc Faber’s investing advice for 2010 is this — listen to the experts, and then do the opposite. Faber, the editor of The Gloom Boom & Doom Report, wrote in his most recent January newsletter that he was bullish on U.S. stocks.

Nothing lasts forever, though.

He’s changed his mind after participating in this week’s Barron’s round-table discussion. “Everybody was looking for further gains in stocks,” he tells Henry in this clip. That opinion is also reflected by Bloomberg’s latest investor survey, which registered its highest level of bullish sentiment since the survey began in 2007.

That overwhelming consensus worries Faber. He now thinks a correction in U.S. stocks could come much sooner than most predict. Momentum players who are driving the market could “pull the trigger relatively quickly,” he says. He also observes that the charts of stocks favored by momentum investors, like Google, RIM, Apple and Amazon, look to be flattening out.

Overall, 2010 will not be one for the record books, as 2009 was. He’s looking at a more normal 5%-10% rate of return for global investors.